Little did Edward A. Murphy, Jr., an American aerospace engineer, realize that one of his design advice would become one of most popular epigrams and be termed Murphy’s Law. In the late 1940s, Murphys told his team that “If there are two or more ways to do something and one of those results in a catastrophe, then someone will do it that way.” This advice was later restated by Arthur Bloch in his book Murphy's Law, and Other Reasons Why Things Go WRONG as “Anything that can go wrong, will go wrong.”
In 1997 Sebastian Junger wrote a creative account of the 1991 ill-fated fishing expedition of the boat Andrea Gail from Massachusetts. The boat was caught in a severe sea storm and all the six crew members were reported dead. The book, titled “The Perfect Storm”, was later adapted into a movie with the same title. ‘The Perfect Storm’ is one of the perfect examples of Murphy's law applying in real life situations.
As of this morning, the Indian equity markets appear heading into a perfect storm. Anything that can go wrong appears to be going wrong. Let’s pray Murphy fails this time.
Economy stuck in slow lane
The broader economic growth momentum has stalled, completely negating the impact of the massive Covid stimulus. After a couple of years of denial, most agencies are gradually acknowledging that the real GDP growth might be settling in the 6%-6.5% band. As the latest Union Budget depicts, the fiscal leverage to stimulate growth has now mostly dissipated.
It is worth noting that FY26BE fiscal deficit of 4.4% may appear encouraging in recent context, but is far higher than pre Covid FRBMA mid-term target. Besides, as per FY26BE interest payments are projected to be 37.2% of total revenue receipts (vs ~23% in FY18RE). Obviously, the present debt and deficit levels are not sustainable.
For record, FY19BE projected fiscal deficit at 3.3%; to be cut to 3% of GDP by FY21. If the government aims to achieve this target by FY29, there would be hardly any fiscal leverage available to the government for increasing expenditure.
The central government capex, as percentage of GDP, may have already peaked around 3% of GDP. Even taking into account the state level capex, the total public capex is now stuck at 4%-4.5% of GDP, with significant risk of slippages due to resource constraints and execution failure.
The scope for increasing government consumption (revenue expenditure) is limited and would depend entirely on the tax buoyancy. The finance minister has assumed an income tax buoyancy of 1.4 in her estimates for FY26BE. This implies the government expects 1.4% rise in personal income tax revenue for every 1% rise in GDP. Even the STT collections, which are entirely a function of stock market trading volumes & MF flows, are assumed to be growing 41.8% in FY26.
Even with these aggressive tax revenue assumptions, government revenue expenditure (ex-interest) is expected to settle around 5% of GDP, much lower than ~7.5% seen during pre-Covid years.
Aggressive tax buoyancy assumptions, despite exempting personal income upto Rs12 lacs from income tax, indicate continued pressure on the upper middle-class segment consumption. This is the segment which has provided material boost to consumption growth, especially in the premium segments like SUVs, premium liquor, travel & tourism, clothing etc.
Despite all the efforts and incentives, private capex for new capacity addition has not picked up. Most private capex in the past five year has been in technology (improving productivity), real estate accumulation, brown field expansions, and consolidation through merger and acquisitions. There have been only a handful of greenfield manufacturing projects. Consequently, the share of manufacturing in GDP has not improved (in fact declined marginally). With sub-optimal consumption demand, positive real rates, and global headwinds on exports, the visibility of any material pick-up in the private capex remains low.
Thus, all the macro drivers of growth (consumption, investments, exports) are facing headwinds. At this point in time, it appears unlikely that in the next 4-5 quarters we shall witness any substantial improvements in most of the growth drivers. However, if the Mother Nature gets angry (a hotter winter, just like the warmer winter this time); or the ongoing global trade war triggered by President Trump gets uglier, the things could worsen further and we may witness growth trajectory collapsing further to pre Covid trajectory of 5-5.5%.
Corporate earnings fatigued
After compounding at a rate of ~18% over five years (FY20-FY24), the corporate earnings appear fatigued. Nifty50 FY25E earnings are expected to grow at a meager 2%-3%. As per the current consensus estimates, FY26E Nifty 50 EPS may grow ~12-13% yoy. However, given the macro headwinds, INR weakness, tariff headwinds for exports, persisting slowness in consumption demand, indicate some downside risk to the current consensus estimates.
The earnings growth in the recent past particularly led by banking, commodities (metal & energy) and capital goods & construction sectors.
Recent performance of the banks indicates that the growth drivers are now tired. Asset quality has peaked for most banks. Any further slowdown in the economy may actually trigger a reversal. Some segments like microfinance, unsecured personal loans and gold loans etc. are reportedly already showing considerable deterioration. Beginning of rate cut cycle with emphasis on immediate transmission, indicates that net interest margins may also be closer to peak and might begin to stagnate or moderate from current levels. Rising stress on household balance sheets, slowing demand for automobile and other consumer discretionary items, and slower private capex growth may keep the credit growth under check. Any substantial improvement in earnings growth for the financial sector in the near term is unlikely.
The demand growth for building material, steel, and other metals has moderated in FY25. The management commentary indicates only moderate improvement in FY26 with continuing margin pressures, given low-capacity utilization and lack of pricing power. Durable tariff by the US, might result in EU and Chinese dumping in countries like India, further pressurizing the domestic prices.
Several mega infrastructure projects like expressway, airports, freight corridors etc. are nearing completion. The pipeline of large infrastructure projects is diminishing in size; and the focus is on completion of the stuck projects. The visibility of large contracts for construction companies, except in the power sector, is poor in FY26 at least.
It is important to note that a large part of stock price rise in the past four years has occurred due to PER re-rating in anticipation of strong earnings momentum. Lack of sustained earnings momentum might result in some PE derating also; while there is no case for a further PER rerating.
Overall, any material upgrade in earnings estimates and PER rerating looks unlikely. However, there is a decent probability of earnings slowdown and PER derating persisting through FY26.
Technical indicators pointing to further downside
With a material erosion in stock prices over the course of the past six months, the investors’ buoyancy has eroded to a large extent. The broader markets with over 20% correction from recent highs are already showing a bearish trend. Benchmark indices are down ~13% from their recent highs and are showing distinct technical weakness – trading below all key moving averages. The technical studies indicate 4-5% further downside from the current levels.
However, if the earnings deteriorate and global noise rises, the immediate technical support may break and markets may head for much lower.
The perfect storm
Deteriorating macro, global headwinds, stagnating earnings growth and PER derating, and weak technical positioning could forma perfect storm for the Indian equities. Murphy’s law says it is more likely to happen. Let’s pray Murphy fails this time.
